Braintree Real Estate Mgmt. Co. Llc. v. Citigroup Global Mkt.s Inc.

• Decision Date: 12 October 2010
• Docket Number: No. 09-2540.,09-2540.
• Parties: BRAINTREE LABORATORIES, INC., Braintree Holdings, and Braintree Real Estate Management Company, LLC., Plaintiffs, Appellants, v. CITIGROUP GLOBAL MARKETS INC. and Citi Smith Barney, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

622 F.3d 36

BRAINTREE LABORATORIES, INC., Braintree Holdings, and Braintree Real Estate Management Company, LLC., Plaintiffs, Appellants,

v.CITIGROUP GLOBAL MARKETS INC. and Citi Smith Barney, Defendants, Appellees.

No. 09-2540.

United States Court of Appeals,First Circuit.

Heard March 1, 2010.

Decided Oct. 12, 2010.

Barry S. Pollack, with whom Joshua L. Solomon, Phillip Rakhunov and Sullivan & Worcester LLP, were on brief, for appellants.

Charles E. Davidow, with whom Brad S. Karp, Susanna M. Buergel, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Robert A. Buhlman, Brandon L. Bigelow and Bingham McCutchen LLP, were on brief, for appellees.

Before BOUDIN, Circuit Judge, SOUTER, ^* Associate Justice, and HOWARD, Circuit Judge.

HOWARD, Circuit Judge.

In February of 2008, the market for auction-rate securities (“ARS”) froze, creating a well-publicized liquidity crisis. During the following summer, plaintiffs Braintree Laboratories, Inc., Braintree Holdings, and Braintree Real Estate Management Company (collectively, “Braintree”) made $41 million worth of investments in ARS-by that point already illiquid and significantly depreciated-at par value. Braintree later insisted that it had been deceived. Claiming that its broker-dealer, defendant Citigroup Global Markets, Inc. (“CGMI”), ¹ had misrepresented the purchased securities as entirely liquid money market investments, Braintree brought this action in federal district court seeking rescission of the transactions, restitution of the consideration paid, and damages.

The district court ordered the dispute transferred to arbitration pursuant to Braintree's brokerage agreement. It also denied Braintree's request for a mandatory preliminary injunction to rescind the contract and refund the purchase price, pending arbitration. Braintree Labs., Inc. v. Citigroup Global Markets, Inc., 671 F.Supp.2d 202 (D.Mass.2009). Braintree now appeals both of those decisions.

I.

ARS are debt instruments, such as municipal or corporate bonds, with long-term maturities. Their interest rates or dividend yields are reset periodically through so-called Dutch auctions managed by the issuing bank or another financial institution. Potential purchasers, including the existing holders of the securities, bid the lowest interest rate or dividend yield that they are willing to accept. A designated auctioneer then sets the interest rate for the period until the next auction by determining the lowest bid rate at which all securities at auction could be sold to buyers.

So long as auctions continue to clear, meaning that a willing bidder exists for every security up for auction, then any holder can turn around and sell the security as soon as the next auction arrives-typically either a week or a month distant. If, however, the number of bids submitted is less than the number of ARS up for auction, then the auction fails. When such a failure occurs, ARS holders wishing to sell are unable to do so. As a result, the securities' liquidity depends on there being a critical mass of bidders.

For years, investors in ARS generally did not need to fear auction failures, as the broker-dealers who facilitated the auction would voluntarily place “cover bids” to purchase the number of ARS necessary to ensure the auction cleared, effectively serving as bidders of last resort. Failures remained the exception rather than the rule, and broker-dealers were able to promote ARS as cash equivalents with the advantage of higher interest rates than a short-term loan. By early 2008, the market for ARS had grown to $330 billion.

In February 2008, the system collapsed. With the worldwide credit markets in crisis, broker-dealers that had previously intervened to ensure successful auctions ceased to do so. Auctions began to fail widely, and many owners of now-illiquid ARS were left holding their investments indefinitely.

The freeze in the ARS market sparked a number of class action lawsuits and regulatory enforcement measures against the firms that had marketed ARS to investors as liquid money market alternatives. One of these firms was CGMI. In August 2008, CGMI entered into a settlement agreement with the Securities and Exchange Commission (“SEC”), as well as with various state agencies. That agreement provided some relief to certain classes of investors, but those not covered by it were left to pursue private litigation for redress of their losses.

Braintree Laboratories, a pharmaceutical company, is one of the many institutional investors that purchased ARS from CGMI. ² It opened brokerage accounts with CGMI between 2001 and 2003, and had bought ARS from CGMI well before the market froze in 2008. Braintree has not challenged any of these pre-2008 sales. Rather, Braintree alleges that CGMI continued to sell it ARS in a series of transactions between June and August 2008-well after the freeze and during the pendency of regulatory investigations-while incorrectly informing Braintree that the securities were liquid government bonds. Seeking to rescind these sales, which were not affected by CGMI's settlements, Braintree brought suit in federal district court under Section 10(b) of the Securities Exchange Act of 1934, the Massachusetts Uniform Securities Act, and other state statutory and common law doctrines not at issue in this appeal. ³

Braintree's primary piece of evidence supporting its allegations is the sworn testimony of Peter Renaghan, Braintree's broker at CGMI and the employee who sold the disputed securities on CGMI's behalf. During a deposition for a related state action, Renaghan stated that he had never used the term ARS in connection with the sale, instead referring to the securities as money market alternatives that could be sold within seven days. Renaghan recounted how Braintree had emphasized from the start that its top investment priority was liquidity. Renaghan then explained that he had mistakenly believed these securities to satisfy that objective, and that Braintree had in turn believed the inaccurate information that he gave.

CGMI responded to the complaint by moving to transfer the dispute to arbitration, pursuant to a clause in Braintree's brokerage agreement. While that motion was pending, Braintree moved for a preliminary injunction requiring CGMI to refund the purchase price pendente lite. Finding the arbitration clause to be binding and provisional relief to be inappropriate, the district court granted CGMI's motion and denied Braintree's. Braintree now appeals both rulings.

II.

Braintree first appeals from the denial of its motion for a preliminary injunction pending arbitration. District courts have the authority to issue injunctive relief even where resolution of the case on the merits is bound for arbitration. P.R. Hosp. Supply, Inc. v. Boston Scientific Corp., 426 F.3d 503, 505 (1st Cir.2005). ⁴ Accordingly, courts assessing the propriety of injunctive relief pending arbitration proceed according to the familiar set of four factors: “(i) the likelihood that the movant will succeed on the merits; (ii) the possibility that, without an injunction, the movant will suffer irreparable harm; (iii) the balance of relevant hardships as between the parties; and (iv) the effect of the court's ruling on the public interest.” Waldron v. George Weston Bakeries, Inc., 570 F.3d 5, 9 (1st Cir.2009).

Braintree does not seek a traditional, prohibitory preliminary injunction, but instead asks for a mandatory preliminary injunction, which requires affirmative action by the non-moving party in advance of trial (in this case, rescission of the contract and a refund of the purchase price pendente lite). Because a mandatory preliminary injunction alters rather than preserves the status quo, it “normally should be granted only in those circumstances when the exigencies of the situation demand such relief.” Mass. Coal. of Citizens with Disabilities v. Civil Def. Agency, 649 F.2d 71, 76 n.7 (1st Cir.1981). Nevertheless, those exigencies should still be measured according to the same four-factor test, as “[t]he focus always must be on prevention of injury by a proper order, not merely on preservation of the status quo.” Crowley v. Local No. 82, 679 F.2d 978, 996 (1st Cir.1982), rev'd on other grounds by 467 U.S. 526, 104 S.Ct. 2557, 81 L.Ed.2d 457 (1984), (quoting Canal Auth. v. Callaway, 489 F.2d 567, 576 (5th Cir.1974)). ⁵

The district court denied Braintree's motion after considering the first two of these factors, which weigh heaviest in the analysis, Gonzalez-Droz v. Gonzalez-Colon, 573 F.3d 75, 79 (1st Cir.2009), and concluding that the motion failed on each of them. On appeal, we review the district court's decision using the same four-factor test. We will reverse a denial of a preliminary injunction only if “the district court mistook the law, clearly erred in its factual assessments, or otherwise abused its discretion in [denying] the preliminary injunction.” ANSYS, Inc. v. Computational Dynamics N. Am., Ltd. 595 F.3d 75, 77 (1st Cir.2010). “Within that framework, however, findings of fact are reviewed for clear error and issues of law are reviewed de novo.” United States v. Weikert, 504 F.3d 1, 6 (1st Cir.2007) (internal quotation mark omitted).

In this case, we need to focus our attention on only one of the four factors-irreparable harm, “the essential prerequisite for equitable relief,” Gonzalez-Droz, 573 F.3d at 81-as Braintree's insufficient showing on it disposes of the claim. Rejecting Braintree's claim that illiquidity was forcing it to forego certain unspecified investment opportunities, the district court concluded that “a need for liquidity is not irreparable harm because plaintiffs offer no evidence that [CGMI] cannot pay damages and thus provide an adequate remedy at law. Prejudgment interest, moreover, compensates for any loss of use of money.” Braintree Labs., Inc., 671 F.Supp.2d at 208.

On appeal, Braintree urges that its ongoing inability to liquidate its investments is...